The Abu Dhabi Investment Authority will invest $7.5 billion in Citigroup, offering the nation’s largest bank needed capital to offset big losses from mortgages and other investments.
The cash from the sovereign investment fund of the Gulf Arab state, which has benefited from this year’s surge in oil prices, will be convertible into no more than 4.9 percent of Citigroup Inc.’s equity. Citigroup characterized the investment as passive and said the fund will not be able to name any board members to the bank.
The Investment Authority’s purchase, announced late Monday, would make it one of Citi’s largest shareholders.
“We see in Citi a highly respected company with a premier brand and with tremendous opportunities for growth,” said the Investment Authority’s managing director, Sheikh Ahmed Bin Zayed Al Nahayan. “This investment reflects our confidence in Citi’s potential to build shareholder value.”
The investment, which was expected to close within the next several days, will be considered Tier 1 capital for regulatory purposes, helping Citi reach its goal of returning to its target capital ratios in the first half of 2008, the bank said.
Citigroup’s shares have lost about 45 percent of their value since the beginning of this year, wiping away $124 billion in market capitalization, as the drumbeat of bad news about its investment losses has mounted.
Shares jumped more than 2 percent, or $2.10, to $31.86 in premarket trading Tuesday, after touching a five-year low Monday.
Charles Prince stepped down as Citigroup’s chairman and chief executive Nov. 4, the same day Citi announced that it will likely write down the value of its portfolio by $8 billion to $11 billion in the fourth quarter.
In the third quarter, the bank’s exposure to assets tied to subprime mortgages led to a loss of about $6.5 billion.
Citigroup executives said Monday that a deteriorating business climate could mean a new round of job cuts, even after the bank pared its 320,000 workforce by 17,000 positions earlier this year. Pummeled by billions in writedowns, Citigroup is reviewing its cost structure to bring it in line with “economic realities,” the company said.
The Investment Authority will receive equity units that pay an 11 percent annual yield until they are converted into Citigroup common shares at a price of up to $37.24 a share between March 15, 2010, and Sept. 15, 2011.
Analysts believe the Investment Authority is the world’s largest sovereign wealth fund, although the fund has never publicly revealed its total assets. Analysts estimate the fund controls hundreds of billions of dollars, with some experts saying the amount could be approaching nearly a trillion dollars.
Sovereign funds throughout the Middle East have been building up overseas investments recently, much of it on the back of oil prices that have risen more than 60 percent this year, bringing record cash flow to the region. China and Russia also have considerable funds they are sending overseas.
Unlike its counterparts in Dubai, the Investment Authority provides very little information about its investments, with analysts saying it appears to regularly purchases less than 5 percent of the companies it targets to avoid having to disclose the investments.
Dubai International Capital, which is owned by the ruler of that booming Persian Gulf city-state, announced earlier Monday that it has acquired a stake of undisclosed size in the Japanese electronics and media company Sony Corp. Its other investments this year included acquiring a 3.12 percent of European Aeronautic Defence & Space Co., which builds Airbus commercial planes and military aircraft. The firm also holds stakes in Daimler AG and British bank HSBC Holdings PLC.
Many companies have welcomed such investments because the funds tend to be stable investors, but some U.S. officials have expressed concern that their acquisitions could target sensitive industries with links to national security.
Abu Dhabi’s move recalls the early 1990s investment in Citi made by Saudi Prince Alwaleed bin Talal. After the bank made some losing bets on U.S. real estate and Latin America, Alwaleed bought a stake for less than $600 million that has since ballooned into billions.
The Abu Dhabi investment comes at a time when Citi is trying to reassure investors amid heavy credit-related losses and a search for a new CEO.
“This investment, from one of the world’s leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business,” Win Bischoff, acting chief executive, said in a statement.
“This investment also enables us to access capital in an efficient manner, and is consistent with our strategy of maintaining a balance sheet that benefits from highly diverse sources of funding in terms of both geography and type of security,” Bischoff said.